On December 20, 2018, the PCAOB adopted a final standard, Auditing Accounting Estimates, Including Fair Value Measurements. The Board also adopted amendments to its standards to address the auditor's use of the work of specialists. These new and revised standards are aimed at promoting consistent application in practice and improving audit quality.
Accounting estimates often have a significant impact on a company's reported financial position and results of operations. Estimates are necessary, for example, in reporting revenues from contracts with customers, valuing certain financial and nonfinancial assets, and in determining impairments of long-lived assets, allowances for credit losses, and contingent liabilities. Accounting estimates generally involve subjective assumptions and measurement uncertainty, making them susceptible to management bias. They are also often an area of higher risk in an audit.
Many companies employ or engage specialists to provide information used in the preparation of their financial statements. Auditors may use the work of company specialists as audit evidence, and also may employ or engage their own specialists to assist in obtaining and evaluating audit evidence, in particular in auditing certain accounting estimates.
The new standard on auditing estimates replaces three existing auditing standards,1 and establishes a uniform, risk-based approach. The new standard is intended to change existing requirements by:
The Board is amending two existing standards, AS 1105, Audit Evidence, and AS 1201, Supervision of the Audit Engagement. The Board is also replacing AS 1210, Using the Work of a Specialist, with a new AS 1210, Using the Work of an Auditor-Engaged Specialist.
For use of the work of a company's specialists as audit evidence, the Board is:
For use of the work of an auditor's specialist, the revisions to AS 1201 and AS 1210:
1 AS 2501, Auditing Accounting Estimates, AS 2502, Auditing Fair Value Measurements and Disclosures, and AS 2503, Auditing Derivative Instruments, Hedging Activities, and Investments in Securities
Subject to approval by the SEC, the new and revised standards will take effect for audits of fiscal years ending on or after December 15, 2020. These standards will apply to all audits conducted under PCAOB standards.
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